Restructuring in the retail sector: what does the future hold?
Many retailers will find that their cash levels are significantly depleted, and will need to kickstart an uplift in trading in the coming months to avoid running out of funds over Q1. It’s vital that online sales perform well during this period, and their focus should be on finding ways to maximise trading to help restore cash reserves. Some of the UK’s mid-market fashion brands have suffered from chronic underinvestment in their digital presence in recent years, and are therefore not adequately equipped to keep up with the competitive appeal of newer, digitally-led brands such as PrettyLittleThing and boohoo. The financial strength and liquidity of many of these bricks and mortar retailers have been severely tested with the fall-off in demand, and many employees have been furloughed as a result. It’s likely that retailers solely reliant on bricks and mortar will run out of cash in the coming months. The UK government has confirmed the moratorium on commercial property tenant evictions for non-payment of rent, which has been extended to the 31 March 2021, won’t be extended any longer. It’s crucial bricks and mortar retailers put in place contingency measures now before the moratorium ends when their ‘deferred’ rent bill will be due, which will also coincide with the end of the business rates holiday.
In comparison, shop prices declined over the year, falling by 1.8 per cent in annual terms in the run up to Christmas according to the * 1 British Retail Consortium (BRC), as non- food stores offered large discounts during this period - a bigger fall than has been typical over the past 12 months. The figures by the BRC showed retailers suffered their worst annual sales performance on record in 2020. It’s clear the pandemic has accelerated a seismic shift in consumer habits, and with global trading relationships evolving following Brexit, 2021 marks an important sea change for the industry. Here, we explore the specific challenges the industry is facing, and the immediate and long-term priorities for retailers.
What is the current state of play?
Adaptability has been key in the current climate. Non-essential retailers that have rapidly embraced technology in response to lockdown measures have fared much better than those that have failed to innovate. Tony Wright Restructuring Advisory
While these are troubled times for the UK retail sector, the effects of the pandemic represent a game of two halves. There’s a stark contrast between businesses that have experienced a boom in demand, such as grocery and homeware brands, and non-essential sub-sectors, such as fashion, that have suffered a significant drop off in sales. Adaptability has been key in the current climate. Non- essential retailers that have rapidly embraced technology in response to lockdown measures have fared much better than those that have failed to innovate. With physical shops closed, many retailers have found creative ways of engaging customers through virtual consultations and interactive live streaming. While they’ve had to invest in the necessary resource to provide virtual walk-throughs for their stores and products, the additional spend has been offset as it has helped them to drive sales of big- ticket items. Quick and savvy thinking like this will see some retailers emerge in a better position than their competitors when the pandemic subsides. For traditional mid-range clothing brands, particularly womenswear outlets, the impact of the pandemic on physical footfall has been challenging. A large portion of the businesses affected over the last year have been bricks and mortar fashion retailers and department stores. Retailers with an older customer demographic have found that their customer base has been reluctant, or in many cases, unable to travel to physical stores. In addition, many consumers will have discovered new brands offering high quality websites that are easy to navigate and have seamless payment methods during this time. Many could well be unlikely to return to their previous shopping habits when the effects of the pandemic subside, having found online shopping a more convenient way to complete purchases. Spring 2021 in particular will be a crunch point for retailers that are experiencing cashflow issues after Christmas, and the coming months will determine the future of many operators across the sector.
How has the COVID-19 pandemic impacted consumer habits?
Lifestyles across the UK have changed due the pandemic, and this has been reflected in changing consumer habits. With a large proportion of the population now working from home, sales of formal and office wear have dropped significantly, impacting retailers that specialise in these categories. Limited opportunities for social activities and the logistical challenges of returning goods have also impacted fast fashion, despite the relative resilience of this sector – although sales of loungewear have surged on balance. And with overseas travel and celebrations cancelled, consumers have had more money - and a greater desire - to invest in home improvements. Homeware stores such as B&Q, IKEA and Homebase have seen an impressive uptick in custom, leading to growth opportunities in the sub-sector. A swathe of businesses has also circumvented the restrictions on non-essential retailers. As ‘essential’ retailers, supermarkets have continued to sell books, stationery and clothing while competitor stores have been forced to close, adding further profits to their already soaring grocery sales. Perhaps the biggest change brought about by the pandemic, is the accelerated transition to an e-commerce-led market, with chains such as boohoo, PrettyLittleThing, ASOS and The Hut Group primed to grow rapidly in years to come.
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